Dangers of Inflation with the Fed

The Federal Reserve right now has a huge balance sheet. It has just given or loaned out or allowed cheap credit for, trillions of trillions of dollars. Far more than the TARP or the Obama stimulus package combined. If it works, it means that the demand (read: “value”) for money will eventually start going down because there will be a lot more of it flushing around in the system. The Fed will eventually have to get rid of all of the debt or else we’ll have a big rise in inflation. If it does that by selling bonds (hundreds of billions of them), and does it too quickly, it could cause bond prices to fall and yields to rise. If that caused (and it probably would) interest rates to go up, it would hit the mortgage loans again and corporate lending markets and could kick off a new recession.